Assume Individuals Consider Only the Medium- Run Effects of Changes

Multiple Choice

Assume individuals consider only the medium- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose policymakers announce a reduction in future government spending. Which of the following will occur as a result of this expected government spending reduction?

A) A decrease in the expected future interest rate and no change in expected future output.
B) A decrease in the expected future interest rate and an increase in expected future output.
C) A decrease in the expected future interest rate and a decrease in expected future output.
D) A decrease in the expected future interest rate and an ambiguous effect on expected future output.
E) A decrease in the expected future interest rate and a constant expected future output.